Credit and debt: interest rates, credit scores and loans

Grade 12 Social Studies Worksheet

Circle the best answer.

1. Read this first

   Three $12,000 car loans (example figures, made up for practice)

   Loan	APR	Months	Monthly payment	Total interest
   Loan 1	5%	48	$276	$1,265
   Loan 2	11%	48	$310	$2,887
   Loan 3	5%	72	$193	$1,915

   Each loan is for an adult buyer, and each is paid off on schedule.

2. 1.

   Milo compares Loan 1 with Loan 3, both at 5%. Which statement does the card support?

   • Loan 3 costs less overall, because its lower payment means the buyer pays less each month.
   • Loan 3 has the lower payment, $193, but costs $650 more in interest over 24 extra months.
   • Loan 1 costs more in total, because its monthly payment of $276 is the higher of the two.
   • The loans cost the same, because they have the same APR and the same $12,000 amount.
3. 2.

   A buyer can pay at most $200 a month. Which choice and caution does Pia give from the card?

   • Only Loan 3 fits, at $193 a month; it costs $650 more in interest than Loan 1 would have.
   • Loans 2 and 3, because both have payments under $320 and the buyer can fit either one.
   • Loan 3, because its lower payment also gives it the lowest total interest of the three.
   • Loan 1, because it has the lowest total interest, so it is the cheapest for this buyer.
4. 3.

   Loans 1 and 2 are both 48-month loans for $12,000. Ari compares them. What does the APR gap cost?

   • $720 more in interest on Loan 2, because 6% of $12,000 is the cost of the APR gap.
   • $1,622 more in interest on Loan 2: a 6-point higher APR on the same amount and term.
   • Nothing more on Loan 2, since both loans borrow $12,000 and the lender is paid back $12,000.
   • $34 more a month on Loan 2, so the APR gap costs just the $34 difference in the payment.

5. Card

   a fixed-rate loan (made up for practice). A borrower and a lender sign a loan at a fixed 6%. At signing both expect prices to rise 2% a year. Prices rise 5% a year instead. At the same time, a saver earns 3% on a deposit.

6. 4.

   The saver wonders about holding cash or the deposit. What does Esme say about buying power over a year?

   • The deposit keeps more: cash loses 5% of its buying power, but the 3% deposit loses about 2%.
   • Cash keeps more, since the deposit's 3% is below the 5% rise in prices and so the deposit loses value.
   • The deposit gains 3% in buying power, since the bank pays 3% and that is what the saver keeps.
   • Both lose the same, because prices rise 5% and that rise applies to cash and deposits alike.

7. Two adult borrowers' credit use (example figures, made up for practice)

   Borrower	Credit limit	Balance	Late payments in 12 months
   Dana	$5,000	$4,750	0
   Eli	$5,000	$500	2

   The Consumer Financial Protection Bureau lists bill-paying history and how much of the available credit is used among the factors that scoring models consider.

8. 5.

   Kira compares the two borrowers using the card. Which statement does the card support best?

   • Dana's score is higher, because a perfect payment record outweighs any other factor.
   • The scores are equal, because each borrower is strong on one of the two listed factors.
   • Eli's score is higher, because using 10% of his credit is far better than using 95%.
   • Dana has the cleaner record and Eli uses less credit; the card cannot rank their scores.
9. 6.

   Dana wants to improve a factor on the card. Which action does Luz say addresses a listed factor most directly?

   • Lowering her credit limit to $4,800, which she hopes will show that she is careful.
   • Paying her bills earlier each month, since she is trying to raise her payment history.
   • Paying her balance down toward $500, which cuts the share of her credit that she uses.
   • Closing the account, since a closed account removes the $4,750 balance from her reports.
10. 7.

    Each loan is for an adult buyer, and each is paid off on schedule. A buyer with Loan 2 has an extra $1,000 and compares prepaying it with a 4% savings deposit. Which comparison does Noah make?

    • The deposit, since it earns $40 a year while prepaying saves just $11 on $1,000.
    • Prepaying Loan 2 avoids 11% interest; the deposit earns 4%, so prepaying returns more.
    • The deposit, because a safe 4% is better than a debt that has a fixed payment already.
    • Equal, because $1,000 is the same $1,000 whether it is saved or sent to the lender.
11. 8.

    The card charges 18% APR, which is 1.5% a month on the balance still owed. There are no new purchases. Ren looks at each step up in the monthly payment on the card. Which statement does the table support?

    • Savings grow at each step, since a bigger payment cuts more interest than the one before.
    • The $150 payment saves nothing beyond the $100 payment, since the balance is nearly paid.
    • Each step saves the same, because the APR is 18% in each case and APR sets the saving.
    • Each step saves interest, but the saving per extra dollar of payment shrinks.

12. Use this

    Two $9,000 loans over 36 months (example figures, made up for practice). Columns: Loan, APR, Monthly payment, Total interest. Car loan, secured by the car, 6%, $274, $857; Personal loan, unsecured, 12%, $299, $1,761. Both loans are for adult borrowers. If a borrower stops paying, the lender may take the car on the secured loan.

13. 9.

    Tala asks why the secured loan carries 6% and the unsecured loan 12%. Which reason fits the card?

    • Lenders like cars, and that liking is passed on to the borrower in the form of a lower rate.
    • Cars lose value, so lenders charge less on loans for cars than on any other loan.
    • Borrowers who need unsecured loans have worse credit, so the rate on theirs is higher.
    • If the borrower stops paying, the lender may take the car, which cuts the lender's risk of loss.

14. Card

    An ad (made up for practice). "Our average customer saves $1,000 in interest." The ad does not say what the customers would have paid elsewhere, their loan amounts or their terms.

15. 10.

    What must the ad show before Zee can call $1,000 a saving?

    • The lender's APR, since the APR alone shows how much interest each customer saves.
    • The lender's profit on each loan, since a saving for customers is a cost to the lender.
    • How many customers were surveyed, since a saving needs a large sample behind it.
    • What the same customers would have paid otherwise, on loans of the same amount and term.